Best Practices in Driver Based Planning
Transcript of Best Practices in Driver Based Planning
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2008 IBM Corporation
Best Pract ices in driver-based planning
Stephen Brook
Manager, IBM Cognos Innovation Center
EUR/USD - Last 2 Years
Volati l i ty and Uncertainty are Now Bu siness as Usu al
30%swing
Similar volatility in
Commodity prices
Real estate
Consumer spending
Employment
Source: http://uk.finance.yahoo.com/q/bc?s=USDEUR=X&t=2y&l=on&z=l&q=l&c=
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Could w e have been better prepared?
Why didnt we have fast, relevant information thatwould have enabled us to respond more quickly andeffectively?
Why didnt we see the patterns, trends and
forecasts that would have enabled us to take theright strategic decisions?
Why didnt we know which business segments werecreating value and which werent so we could betterallocate our resources?
And why didnt we know how to cut costs withoutcutting value?
Source: Jeremy Hope, 2009, How Performance Management can help you to Navigate through Turbulent Times
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73% of s urveyed com paniesneed morethan 3 mon ths to
complete the annual budg et.*
* Hackett Group 2008
Only 24% are sat isf ied w ith the eff ic iency of the pro cess
Is management satisfied with theefficiency of the budgeting process?
* Hackett Group 2008
%
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But the budgeting process at most
companies has to be the most ineffective
practice in management. It sucks theenergy , time, fun and big dreams out of
an organization. (...) And yet (...)
companies sink countless hours into
writing budgets. What a waste!
Jack Welch, 2005
Discussion Planning & Bud get ing chal lenges
Please describe some of the challenges you face andopportunities for improvement
Examples from other companies include:
Cycle times
Labour intensity
Integrity of data
Number of iterations
Cross-functional visibility
Insight and linkage to strategy
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Techniqu es for driv er-based planning
Re-visitaccountability
Focus onthe realdrivers
Core vsdiscretionary
cost
Knowwhere youare today
Know whereyoure going
Consider riskand projects
2008 IBM Corporation
Re-visi t accountabi l i ty
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Expenses have been g rowin g in recent years
Targets and
incentivesBudget
contracts
Balancedscorecards
Risk models
Management Contro l
10-20% of cos tsStrategy
Alignment
Execution
Micro-management
Accountablefor budgets
More planners, target setters, inspectors, controllers, complianceofficers, internal auditors, risk managers, project teams, consultants,
analysts and advisers
Controlsystems
Source: Jeremy Hope, BBRT
Control
It starts with a simple thing
Accountabil ity
Transparency
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The emerging acco untable and transparent or ganizat ion
Executiveteam
Regions, Brands/product groups,
Customer segments - each with P/L Account
Support
ServicesTeams
Strategy, Finance,
HR, Marketing & IT
Supply chain, New productdevelopment, Production &
Logistics
OperatingProcessTeams
Value center
Value center
Value center
Value center
Value center
Value center
Value center
Value center
Value center
Value center
Value center
Value center
Value center
Value center
Customer
Customer
Customer
Customer
Customer
Customer
Customer
Customer
Customer
Customer
Customer
Customer
Customer
Customer
Aim to create as
many VCTs as
possible (keep
sub-dividing and
adding new
ventures)
Each VCT is
based on a clear
market niche or
customer value
proposition
SSTs and OPTs
serve VCTs
Aim to reduce
size of SSTs and
OPTs over time
Customeraccountability
flows in red lines
Relativeimprovement
accountability in
blue dots
Source: Jeremy Hope, BBRT
Performance Management tools s upport n ew accountabi l i ty f lows
Executive
team
VCTs use KPI dashboards, balanced scorecards,
rolling forecasts, EVA models and ABC models
VCs are based on lean principles and also use value
stream mapping
Support
Services
Teams
Operating
Process
Teams
Value center
Value center
Value center
Value center
Value center
Value center
Value center
Value center
Value center
Value center
SSTs use KPI dashboards
and benchmarking tocontinuously improve
OPTs use lean principles and tools (such as
six sigma) to continuously measure and
improve end-to-end process performance
Customer
Customer
CustomerCustomer
Customer
Customer
Customer
Customer
Customer
Customer
Many tools can
be used at the
team level without
fear of being used
for top-down
control
All tools and
controls are
embedded in a
web-based
enterprise-wide
corporate
performance
management
system
ET maintains
coherence at alltimes
Integrated, enterprise-wide
Information systems
Source: Jeremy Hope, BBRT
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2008 IBM Corporation
Know where you are today
Management repo rt ing is o ver del iver ingon qu ant i ty and u nder del iver ing o n qual i ty
Average length ofmanagement report
Data points
Average amountof informationincluded thatmanagers find useful
30-40 pages
12,000-15,000
5%
Quantity Quality
n = 158Source: CFO Executive Board (Session FourHigh Impact Controllership: Architecting the Data Pipeline for Business Impact, Finance Leadership Academy, 2007)
MonthlyPerformance
Report
18
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What does this report tel l you about expenses?
5,8254,5253,900-6252,500Net profit
11,17547510,1009,6258,500Total costs
1,750501,8001,7501,500Administration
37525400375350Technology
85050900850800Accommodation
3,3001002,5002,4002,250Marketing
90050700650600Travel & entertaining
4,0002003,8003,6003,000Salaries
Sales, General & Admin
51.52%-12.28%48.28%36.00%39.29%GP %
17,000-5,00014,0009,00011,000Gross profit
16,000-1,00015,00016,00017,000Cost of sales
33,000-4,00029,00025,00028,000SALES
ActualVarianceBudgetActualBudget$000s
Last YearThis YearNext YearBudget for 200X
How is this organisat ion performin g?
790,000
14
45 Days
8.5
19.8m
Target
823,533
16
41 Days
8.6
23.6m
Actual
Overhead Expenses
Headcount
Inventory
Customer Satisfaction
Sales
StatusKPI
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Make Report in g Relevant to Decis ion Making
Drive Understanding and Act ion
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2008 IBM Corporation
Know where you re going
Once per year?
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Plans detail how youwould like the future to look
Forecasts describe what the futurewill most likely look like
Budgets detail how youdeploy your resources to get there
The Budget..many th ings to many p eople
Goals andstrategic guidelines
Budgeting processSet targets/ incentives
Allocate resources
Coordinate plans
Variance controls
Keeping
on t rack
Reforecast
Separate
Step 1
Improve
Step 2
Targets
and
Rewards
Planning
andforecasting
Resource
allocations
Measuresand
controls
Medium-term
Aspirational
Relative
Rolling views
Few lines Driver-based
Dynamic
Draw-down
Relative
KPIs
Trends
Relative improvement
Source: Jeremy Hope, 2009, How Performance Management can help you to Navigate through Turbulent Times, Paper #3
Break free from the budget conflicts
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The rolling review and check-plan-act cycle
Fast KPIs
Nature &
Frequency of
Demand
Rolling Forecasts
Peer
Comparisons
(+Gaps)
Act
Check
Forecast
Plan
Value Centreteam
Strategy
Actuals
1st Review
Annual
Plan /Budget
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
AnnualPlanx+1
Year x Year x+1
2nd Review
3rd Review
4th Review
Forecast
Cont inuou s or event-driven planning
2008 IBM Corporation
Focus o n the real drivers
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Busin ess planning proc ess steps
Financial
Target
Trend rate, extrapolation
TargetFinancial
Plan
Tactical
Plan
Financial
Plan
Evaluateoptions
Model thefinancialoutcome
Are these tactics sufficient?
Example custom er support c entre expense plans
Y0 Y1%Uplift
Y0 Y1A B C D
Sustain currentoperations
Improve currentoperations
New ventures orinitiatives
Compliance trainingfor existing staff
Cross-sell training -more products to
existing customersTemporary staff tocover new product
launchUpgrade knowledgemanagement system
+5%
A
B
C
D
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Expense plan
Revenue plan
Sales Call
VolumesHeadcountRequired
New Products
Existing Products
Time toresolve
Training
IT investment
Manage pro cesses and act iv i t ies (cost d rivers)rather than funct ions and bu dgets
EXAMPLES OF BACK OFFICE PROCESSES
Processing a sales order
Receiving payment from a customer
Paying a supplier Completing the month-end close
Approving an investment proposal
Preparing a budget or forecast
Managing a performance review
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Example - Statement of Procurement Costs
50010,50010,000Number of inspections
Volume of business-5004,5005,000Number of Purchase Orders
-802,0102,090TOTAL COSTSDisruption caused by fire-20380400Expenses
Disruption caused by fire-40660700Salaries
Warehousing costs
-10160170Expenses
Fewer inspections20440420Salaries
Quality Assurance
-10100110Expenses
Overtime-20270290Salaries
Purchasing
VarianceBudgetActual
Primary reason$000s$000s$000s
Source: Jeremy Hope, BBRT
Now lets look at the same costs through the lensof a process map with cost drivers
Purchasing
Start PlanProcurement
Purchase parts
Certify Vendor Inspect parts
Receive parts Store parts End
Quality
Assurance
Receiving
Inspec?
15MINS 30 120 20 20 10
$140,000 $400,000 $260,000 $300,000 $190,000 $800,000Total Cost
TOTAL TIME 215 minut es: TOTAL PROCESSING COST: $2,090,000
N/A 400/$1000 5,000/$52 16,000/$18 10,000/$19 16,000/$50Units/cost
N/A N/A 15% 25% 10% N/AErrors
6 Activities (cost drivers)
Source: Jeremy Hope, BBRT
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Quest ions
Why spend on planning when orders can be deliveredwithin 24 hours?
Why not pre-certify strategic suppliers?
Why not agree block contracts with key suppliers thatcan be used without issuing purchase orders?
Why not find root causes of PO/inspection errors andeliminate them?
Why not train warehousing staff to handle inspectionsand abandon QA department?
What is best practice cost and why dont we setbenchmark goals based on them?
Revised procurement forecast based on cost drivers
33.5%29.4%21.1%10.5%Cost reduction (Year on Year)
248.7347.5368.8412.3467.5522.5522.5522.5522.5Total costs
140.0200.0200.0200.0200.0200.0200.0200.0200.0Cost of inventory activities
$35$50$50$50$50$50$50$50$50Average cost
400040004000400040004000400040004000Number of inventory activities
75.093.8100.0106.3112.5122.5122.5122.5122.5Cost of deliveries/inspections
$12.0$15.0$16.0$17.0$18.0$19.6$19.6$19.6$19.6Average cost
625062506250625062506250625062506250No of deliveries/inspections
26.333.833.836.050.065.065.065.065.0Cost of purchase orders
$35$45$45$48$50$52$52$52$52Average cost
75075075075010001250125012501250Number of purchase orders
015255075100.0100.0100.0100.0Certify vendor costs
05.010.020.030.035.035.035.035.0Planning costs
BPFQ+4FQ+3FQ+2FQ+1Q-1Q-2Q-3Q-4Procurement ($000's)
BP=Best Practice
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2008 IBM Corporation
Dist inguish co re and discret ionary cost
Operat ional gearing h eightens cost pressure
40Fixed Cost
Variable Cost
Discretionary Cost
-10%
Margin
30
20
10
40
27
14
9
100 90
-30%
Revenue
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Manage pools of discret ionary expenses using rol l ing forecasts
CORE EXPENDITURE- managed through ratio
and benchmark KPIs
DISCRETIONARYSPENDING
COMMITMENTS -actively managed
AVAILABLERESOURCES -
continuous forecastupdates
Time
Resources UNCOMMITED
EXPENSE POOL -AVAILABLE OPTIONS
Some marketingConsultingProject spendingCapital expenditure
Source: Jeremy Hope, BBRT
Enable access to funds ei ther direct ly or through p eer groupassessment
DISCRETIONARY EXPENSES:
All expenses NOT essential forrunning the business including:
Some marketing 50m
Consulting 25m
Project spending 20m
Capital expenditure 90m
Method 1: Direct accessunder a threshold (say100K) PROVIDED theyfollow decision rules
Method 2: Over athreshold teams mustapply for spendingapproval but decisionmade by VC leaders
Local Team
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Tact ical planning ident i fy ing potent ia l savings
List potential tactics
Screen the mostpromising
Watch for infeasibilities
Benchmark to identifyopportunities
2008 IBM Corporation
Consider risk and projects
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Do cu rrent performance m anagement pract ices have a
bl ind spot that exposes the enterprise to risk?
PerformanceManagement
RiskManagement
Historical View Sense and RespondAnticipate and
Shape
Current uncharteddanger?
Organizations are notseeing or preparingfor many future risks
UNCHARTEDDANGER
Performance
Risk
We are here
Finances Top Areas of ImportancePercent of Highly Important Responses
Source: IBM Global Business Services, The Global CFO Study 2005, The Global CFO Study 2008
As a wh ole, Finance places a lower prior i ty o n sup port ingand measur ing r isk but i t s growing
The importanceplaced on supporting
enterprise risk isgrowing
Performancemanagement tops
agenda
Performance management
Risk management
40%
69%
66%
82%
2005 2008
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Formal risk
management is stillfairly immature
Finance execut ives do not see al l the unc harted d angers
UNCHARTEDDANGER
Managing risk is alower priority
Risks are prevalentand the majorityare nonfinancial
Reducing old risksoften creates new
ones
Risk is not includedin planning
Performancemanagement
Riskmanagement
40%
69%
66%
82%
2 00 5 20 08
Performance management
Risk management
40%
69%
66%
82%
2 00 5 20 08
32%
17%13%
17%
13%
8%
32%
17%13%
17%
13%
8%
Political / Geopolitical Change ofgovernment-and minority
governments
Grants and budgetchanges
Constantchange of ministers
Federal Accountability Act
Terrorism
Strategic
Industry consolidation andglobalization
Error-filled release ofsoftwareupgrade
Change in core productdemand
Cancellation ofmajor customercontracts
Performance standards andservice quality
Financial Currency exchange rates
Interest issue and increasingreserves
Accuracy of realistic balance sheetreporting
Ability to manage cash
Non-transparent markets Economic recession
Energy and commodity costs
Operational Hurricane Katrina
Data center outage
Delivery risk
Blastfurnace cold run
ERP application crash
Plant disaster causing productionstoppage
Legal &Compliance Fraud
Productliability claims
Missed timeline for legal changes
Embezzlementofparts
Safety of goods or products
Environmental / Health
WestNile Virus
Safety crisis
Compliance with environmental standards
SARS Food sanitary managementproblem
Climate change
Environment pollution
45%
51% 53%
59%57%
52%52%
43%
30%
40%
50%
60%
70%
Under$1B $1-$5B $5B-$20B Over$20B
Formal riskidentification
Routinemanagementreporting includes risk
Riskidentificationand managementreporting
45%
51% 53%
59%57%
52%52%
43%
30%
40%
50%
60%
70%
Under$1B $1-$5B $5B-$20B Over$20B
Formal riskidentification
Routinemanagementreporting includes risk
Riskidentificationand managementreporting
Impactof AddressingRisks
Area New RiskAddressedRisk
Creditdefaultswaps
Automatedtechnology
Mergers&acquisitions
e-Business
Outsourcing/offshore
Creditrisk
Manual processingerrors
Productlineexpansion,reducedcosts
Channel conflictsmanaged
Risinglaborcosts
Legalrisk
Catastrophicsystemfailure
Integrationchallenges
Exposuretowidespreadfraud&securityr isk
Qualityissues, knowledgeretention,informationsafety
Impactof AddressingRisks
Area New RiskAddressedRisk
Creditdefaultswaps
Automatedtechnology
Mergers&acquisitions
e-Business
Outsourcing/offshore
Creditrisk
Manual processingerrors
Productlineexpansion,reducedcosts
Channel conflictsmanaged
Risinglaborcosts
Legalrisk
Catastrophicsystemfailure
Integrationchallenges
Exposuretowidespreadfraud&securityr isk
Qualityissues, knowledgeretention,informationsafety
Integrat ing risk management into planning p rocessesrequires a number of act ions
Key Recommendations to Integrate Risk into Planning Processes
Planning Budgeting
ReportingForecasting
CPMProcesses
RISKADJUSTED
RISKADJUSTED
RISK
ADJUSTED
R
ISK
ADJU
STED
Consider traditional & non-traditional risks andprioritize based on value drivers
Correlate independent risks Factor in the compounding
effect of risks
Conduct risk scenarioplanning
Adapt budgets to reflect risk-adjusted planning and factorin risk mitigation costs
When incorporating risks,balance between central and
local / unit level responsibility
Enhance reporting to moveup the maturity model of riskreporting
Include key risk indicators,key failure modes &algorithms / rules for trackingrisks
Drive preventive andcorrective actions
Create a rolling forecast ofrisks
Incorporate the impact ofupside and downside risk(s) onrolling operating forecasts
Source: IBM Institute for Business Value
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Risk-adjusted planning ou tput can inform the budg et ing
process
CPMProcesses
RISK
ADJUSTED
Planning Budgeting
Output
Risk-adjusted Planning Output
Source: IBM Institute for Business Value
Determine the impact ofdownside and upside riskevents
Build in cost for riskmitigation strategies
Risk-adjusted Planning Output Risk-adjusted Budgeting Implication
Strategic objectives and measuresadjusted for:
Potential new risks based onaddressing old risks
Activities to prevent risk events oraddress impacts of risk events
High priority risks basedon value drivers
Take a port fo l io approach to investment
Executive
team
All resources are either drawn down by VCs or allocated to
them
VCTs can make opex and capex decisions within a
threshold
VCTs have incentive to continuously reduce resources
Support
Services
Teams
Operating
Process
Teams
Value center
Value center
Value center
Value center
Value center
Value center
Value center
Value center
Value center
Value center
SST costs are regularly
benchmarked with best practices
VCTs are customers who can
demand SSTs reduce costs
ET acts as aventure
capital
provider
always
prioritizing
resources to
best
opportunities
OPT costs are regularly
benchmarked with best practices
VCTs are customers who can
demand OPTs reduce costs
Customer
Customer
Customer
Customer
Customer
Customer
Customer
Customer
Customer
Customer
As many valuecenters as
possible arecreated based onmarket niches
All capital is
allocated based
on value centerperformance
Whatever thelatest plan says,
teams respond toprevailing demand
Portfolio
Management
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Techniqu es for driv er-based planning
Re-visitaccountability
Focus onthe realdrivers
Core vsdiscretionary
cost
Knowwhere youare today
Know whereyoure going
Consider riskand projects
2008 IBM Corporation
The role of techno logy
How technology can facilitate a continuous, driver-based approach to planning and monitoring
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It s about mor e than Finance
BeyondFinance
67%Finance33%
HumanResources
Sales Planning
Prod. & Distrib.
MarketingOther
FinancialStatements
ExpensePlanning
Capital& Initiative
Top planning areas from a survey of 75 customers
Support ing c ross- funct ional processes: Performance Bluepr ints
SalesPlanning &Forecasting
INTEGRATEDFINANCIAL
STATEMENTS
ExpensePlanning &
Control
CapitalExpenditure
Planning
HUMANRESOURCES
SALESFINANCEFINANCE
OPERATIONS,MARKETING,
ETC.
DepreciationExpenses
Reports
Income StatementsBalance Sheet
Cash flow
Financial Ratios
CapEx
Operating
Expenses
Headcount& CompensationExpenses
Revenue
Plan
MarketDemand
WorkforcePlanning
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Linkage of sales to planning & b udget ing proc ess
To what extent the business entity's "perform planning/ budgeting/ forecasting"system links with the sales s ystem.
Fully integrated, 7%
Strong interface, 16%
Weak interface, 4%
No linkage, 73%
Source: IBM Benchmark Wizard
Benefits of real-t ime collabo ration
Faster sense-checking
Formaliterations
Real-timecollaboration
Better capacity planning Rapid what if analysis
Cope with late-breaking changes
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2008 IBM Corporation
Driver-based planning wi th IBM Cognos solu t ions
Demonstration
Smarter Expense d emo
TM1 Contributor 9.5 + Scorecarding demo
Shows driver-based expense planning forCustomer Support centre
Shows linkage between Revenue planning and
Expense planning Shows linkage of business unit strategy
through to execution & tactics
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Proof points
There are two things about a budget: one is that it
predicts the future, and does a particularly poor job
of that, but secondly, it defines a measure of what
is good. If you make budget, thats good. And if you
dont, youve done a bad job. Unfortunately, trying
to predict the future and define what is good are two
fairly different processes. With the rolling forecastsin the IBM Cognos system, we have a better way to
predict the future, keep it relevant and meaningful.
John Landis, CFO, Foster Farms
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2008 IBM Corporation
Next steps how to get started
UAP: Dr iv ing Performance in Turbulent Times
Within two weeks, UAPhad canceled $2 millionworth of POs forproducts that weren'tneeded. Cover Story: PerformanceManagement Links
Strategy And OperationsBy Doug Henschen,InformationWeekNov. 22, 2008
David Wheat,Director of Decision-Support Systems
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Test ing th e value of current management inform at ion
t0t-12
VariableSG&A cost
as % ofRevenue
t-6 t+3
Relevant ratio
Trend
Tolerance
!
Early alert
!
Call to action
Forecastimpact
Uti l i ties up du e to
end of f ixed pr ice
contract last month
Additionalcontext
Source: Beyond information to insight: the promise of management reporting by David Axson (an IBM Innovation in Action White Paper)
Cri t ica l ly examin e transact ion volum es keydr ivers of cost
Revenuedrivers
Costdrivers
Expenseforecasts
# New product launches # Marketing events # Promotions # Web site visits # Web site downloads # Sales calls # Existing customerrepurchases # Satisfied/dissatisfiedcustomers
# Customercontacts/visits # Deliveries # Customer complaints # Sales/purchaseorders, invoices andpayments # Credit checks # Sales people # Support people # Training days
Salaries Marketing Travel Accommodation Technology Administration
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App raise your curr ent planning proc ess
How long?
How many iterations?
How useful to the business?
IBM Cognos Performance Bluepr in ts
Expense Planning and Control
Sales Planning & Forecasting
Integrated Financial Statements
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Next Steps ...
Come and talk to us
Download our white papers
Contact our local team
More info?
Contact Info:
New website:
www.ibm.com/cognos/innovation-center
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71
Copyright IBM Corporation 2008 All rights reserved. The information contained in these materials is provided for informational purposes only, and is provided AS ISwithout warranty of any kind, express or implied. IBM shall not be responsible for any damages arising out of the use of, or otherwise related to, these materials. Nothingcontained in these materials is intended to, nor shall have the effect of, creating any warranties or representations from IBM or its suppliers or licensors, or altering the terms andconditions of the applicable license agreement governing the use of IBM software. References in these materials to IBM products, programs, or services do not imply that theywill be available in all countries in which IBM operates. Product release dates and/or capabilities referenced in these materials may change at any time at IBMs sole discretionbased on market opportunities or other factors, and are not intended to be a commitment to future product or feature availability in any way. IBM, the IBM logo, Cognos, theCognos logo, and other IBM products and services are trademarks of the International Business Machines Corporation, in the United States, other countries or both. Othercompany, product, or service names may be trademarks or service marks of others.